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Driven by increased adjusted EBITDA and lower interest and debt retirement expenses, the drugstore chain operator, Rite Aid Corp. (RAD - Analyst Report) posted a quarterly profit for the third consecutive quarter. The company’s first-quarter fiscal 2014 earnings of 9 cents per share fared better than the year-ago comparable quarter’s loss of 3 cents.
This Zacks Rank #2 (Buy) company, which competes with China Nepstar Chain Drugstore Ltd. (NPD - Snapshot Report), continues to benefit from 10 straight quarters of improved adjusted EBITDA. Moreover, quarterly earnings were in line with the Zacks Consensus Estimate.
Rite Aid's first-quarter revenues of $6,293.1 million fell 2.7% compared with $6,468.3 million in the year-ago comparable period. The decline in the top line was a result of the introduction of low-cost generics in same-store pharmacy sales. However, total revenue surpassed the Zacks Consensus Estimate of $6,272.0 million. Same-store sales were down 2.5% due to lower pharmacy sales slightly offset by a rise in front-end sales.
During the quarter, front-end sales inched up 0.4%, while pharmacy sales fell 3.8% due to the introduction of new generic drugs that adversely affected sales by 458 basis points (bps). Additionally, prescriptions filled at comparable stores dropped 0.1% from the year-ago quarter. Prescription sales constituted about 67.5% of total drugstore sales, while third party prescription revenues represented 97.0% of the pharmacy sales.
Rite Aid's gross profit increased 4.1% year over year to $1,821.0 million, with gross margin expanding 190 bps to 28.94%, primarily driven by the launch of new generic drugs. Selling, general and administrative expenses decreased 4.7% to $1,609.3 million while as a percentage of sales it contracted 53 bps to 25.57% primarily due to effective cost management.
Rite Aid reported adjusted EBITDA of $344.8 million, up 25.8% from $274.2 million in the prior-year quarter. As a percentage of sales, it improved 124 bps to 5.48%, gaining from higher pharmacy gross margin driven by new generic introductions and improved front-end performance.
Balance Sheet and Cash Flow
At quarter-end, Rite Aid had cash and cash equivalents of $108.9 million and long-term debt (excluding current maturities) of $5,778.7 million. The company ended the quarter with $1.142 billion of liquidity. Rite Aid had $542.0 million borrowing outstanding under its $1.795 billion senior secured credit facility while the company had $113 million of outstanding letters of credit.
During the period, the company generated a cash flow of $184.4 million from operating activities, while it expended nearly $98.1 million (gross) toward capital expenditure. In fiscal 2014, the company expects to incur capital expenditure of $400.0 million.
Renovation in Rite Aid stores continue with the company remodeling 108 outlets during the first quarter. Overall, the company completed wellness remodels at about 905 stores as of the quarter-end. As of Jun 1, 2013, Rite Aid operated about 4,615 stores.
Since the beginning of 2013, Rite Aid has been consistently focusing on debt refinancing activities in order to extend the maturity periods as well as lower the interest rates on its existing debt instruments. It is expected that this strategic move will extend the company’s debt maturities to 2018 and beyond, and simultaneously lower annual interest by $85.0 million.
Fiscal 2014 Guidance
Rite Aid believes that the above-mentioned debt refinancing activities will bear an impact on its fiscal 2014 financial results and thereby, updated its forecasts for the period.
For fiscal 2014, the company raised its low-end adjusted EBITDA guidance range to $1.090 billion from $1.075 billion, but it kept its high-end guidance of $1.175 billion unchanged. However, Rite Aid lowered its fiscal 2014 adjusted earnings guidance. The company now expects adjusted net income in the range of $22–$162 million or 1 cent to 16 cents per share, compared with 4–19 cents forecasted earlier. Currently, the Zacks Consensus Estimate stands at 17 cents per share.
However, Rite Aid, which trails only Walgreen Co. (WAG - Analyst Report) and CVS Caremark Corp. (CVS - Analyst Report) in size, continues to anticipate revenues for fiscal 2014 in the range of $24.9–$25.3 billion, based on same-store sales ranging from a decline of approximately 0.75% to an increase of 0.75%.